Chinese stocks erased all the gains seen during their massive reopening rally that took off late last year, as persistent concerns about the health of the property sector help drive an unprecedented foreign outflow from the onshore market.
The CSI 300 Index fell as much as 0.7% to 3,508.22 on Friday. That’s below its closing level on Oct. 31 last year, the day before frenzied speculation over Beijing’s abandoning of its stringent Covid restrictions sparked an epic surge that lasted about three months. Investor pessimism over an uneven economic recovery and a weaker-than-expected rebound in consumption has since kept equities in a downtrend.
The benchmark’s 16% slide from a Jan. 30 peak has come amid relentless selling by global funds, many of whom cite China’s ongoing housing crisis and tensions with the West as the biggest worries. Recent figures show that property investment — a key driver of China’s economic activity — has continued to slump, offsetting optimism spurred by other data that suggest government stimulus efforts have taken root.
“Headwinds from China’s housing sector are likely to keep any recovery in consumer or business spending tepid, unless a broader reform is seen,” said Charu Chanana, a market strategist at Saxo Markets. “The CSI 300 has erased all its reopening gains as the consumption plane failed to take off, primarily as structural headwinds offset what could have been a cyclical rebound.”
A Bloomberg Intelligence gauge of Chinese developer stocks has tumbled about 44% in 2023 as policy efforts to rescue the property market have proved inadequate. Homebuyers remain cautious and several major developers continue to suffer from liquidity woes.
READ: China’s Home Prices Drop at Faster Pace in Blow to Sentiment
Don’t Buy the Dip
Foreign investors’ outflow from the so-called A-share market has entered “an unprecedented stage,” Morgan Stanley strategists including Laura Wang wrote in a note, stating that the cumulative outflow of $22.1 billion from Aug. 7 to Oct. 19 is the largest in Stock Connect’s history. The Stock Connect refers to trading links between China and Hong Kong.
The selloff speaks to the deeply entrenched pessimism toward Chinese stocks and is reminiscent of the gloom that gripped the market around the same time last year.
Back then, investor angst over the nation’s stringent Covid rules and President Xi Jinping’s power grab sparked a rout that culminated in the CSI 300 capping a fourth straight month of losses on Oct. 31. The very next day, mounting speculation that policymakers were preparing to gradually exit the Covid Zero policy triggered a rally that saw the CSI 300 surge almost 20% over a period of about three months.
The benchmark is now headed for a third month of declines despite a series of steps from policymakers in recent weeks to revive investor confidence. Measures such as boosting of stakes in big lenders by China’s sovereign wealth fund, liquidity injections by the central bank as well as tightening of curbs on short-selling activities had spurred bets of a tactical rebound in the market, which have yet failed to materialize.
Weakness in global equities spurred by geopolitical tensions in the Middle East has made matters worse for China’s market this week, with foreigners on Thursday offloading the most mainland stocks in more than two months.
Some market watchers say the earnings season, as well as upcoming policy meetings including the politburo meeting and the Third Plenum, could offer some positive catalysts.
Down nearly 10% in 2023, the CSI 300 gauge is one of the world’s worst-performing major indexes and on track for an unprecedented third-straight year of losses. The benchmark is trading at 10.3 times its one-year forward earnings estimates, more than two points below a five-year average.
But even as the rout has rendered stocks cheap, Morgan Stanley is advising investors against buying the dip, cautioning that market sentiment is likely to stay fragile and foreign fund outflows could persist in the near term.
“Some market participants are urging the government to relax more but I think execution is more important because even though there have been a lot of policies, the positive impact has yet to filter through the economy or companies’ earnings,” said William Fong, head of Hong Kong-China equities at Baring Asset Management Asia Ltd.
--With assistance from Charlotte Yang and April Ma.